When financial markets wag policymakers

When I was a junior lawyer one of the senior partners at the firm had a case management mantra: “Never let the tail wag the dog.” By this she meant that if an adviser or leader is to be of any value they must keep their focus on end goals and not let interim weakness or bias distract them from fulfilling the duty owed to those they are retained to serve. To do the job well is to take heat. Sometimes it will mean being fired. Sometimes it will mean stepping down. But to cave and capitulate to adverse motives and ignorant agendas is the worst kind of failure.

Over the past 30 years, our financial policy makers and regulators have miserably failed their public mandates and repeatedly caved to the extractive self-interests of for-profit-financial intermediaries. In doing so, a select group of vested interests have swung financial and social stability so far off track that only a massive course correction and across-the-board change of leadership and doctrine can restore us on a path to recovery.

In their out-sized influence on the global banking system and world economy, US policymakers have been particularly devastating leaders. Like Greenspan before him, former FOMC head Ben Bernanke is already being recorded in history as the worst kind of failure. See: The Tragedy of Ben Bernanke:

In 2000, Bernanke had argued that a central bank with sufficient will could “always,” in the medium term at least, restore full prosperity via quantitative easing. If a central bank printed money and bought financial assets on a large-enough scale, people would begin to step up their spending. Even if people believed that only a fraction of quantitative easing was permanent, and even if the incentive to spend was low, the central bank could restart the economy.

In the end however, Bernanke did not deliver. Even though the Fed and many other central banks printed much more money than economists would have thought necessary to offset the impact of the financial crisis, full prosperity has yet to be restored. Bernanke increased the US monetary base five-fold, from $800 billion to $4 trillion. But it wasn’t enough. And then, his courage failing, he balked at taking the next leap: more than doubling the monetary base to $9 trillion. In his last years in office, Bernanke was reduced to begging in vain for Congress to institute fiscal expansion.

In continuing the tradition of ignoring economic data in preference for increasing asset prices at all costs, other Fed heads Janet Yellen, Mark Carney, Mario Draghi and their boards, are not data dependent but rather ‘market dependent’. You don’t need a PHD to be a ‘yes’ man or woman. The market tail owns our central bankers, regulators and many of our politicians. Because of this they will go down in history as the worst kind of leaders: not only misguided, but harmful to those they were appointed to serve. See, Janet Yellen has violated one of the cardinal rules of economists:

“That violates one of the cardinal rules of a young economist that you learn at the Fed, which is don’t let the markets push you around because markets tend to overreact and tend to panic first and think later,” said Lee, who worked as a Fed economist prior to joining Citi.

“The boss is violating that cardinal rule that every young economist has learned,” the economist continued. “Now she’s the insider’s insider so that makes it even more disturbing that the boss, who’s the ultimate insider boss, has violated those junior rules.”

Lee’s assertion gels with the findings of a paper co-authored by Eric Rosengren of the Boston Fed, which noted that “Frequent mentions of financial instability terms at the FOMC…result in a statistically significant reduction in the funds rate.”

The notion that the Fed has an unspoken tertiary mandate to maintain market calm gained traction in the wake of September’s interest rate decision. Monetary policymakers refrained from hiking rates in part due to concerns that August’s carnage in financial markets could weaken real economic activity going forward.”

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